6 things Australian traders will be talking about this morning

Bonds and the US dollar were the big movers last night with selling in European rates markets knocking US 10-year Treasuries to their highest levels since May.

The US dollar also leapt to a 7-month high in index terms and is trading above 105 against the yen and below 76 against the Australian dollar.

And while stocks are only mildly lower in the US futures traders on the local market are declaring that is enough is enough of the recent selling and have taken futures 28 points higher. That was 40 points a couple of hours ago but the fact the local market has underperformed all other big markets in the past two days suggests there is a strong chance of a reversal today (see item 1).

Elsewhere, oil is a little higher on rumours the Saudis know they will have to stump up and take the pain of the production cuts OPEC is looking for, while gold and copper are also higher along with iron ore and other commodities.

Here’s the scoreboard (7.25am):

Dow: 18169 -30 (-0.16%)

S&P 500: 2133 -6 (-0.3%)

SPI 200 Futures (December): 5,281 +28 (+0.5%)

AUDUSD: 0.7684 -0.0060 (-0.78%)

The top stories

1. This chart suggests it’s time for the ASX to have a big bounce. The carnage on the ASX200 continued yesterday, knocking the index back below 5300 for a 2.7% loss over the past two days and wipe out any gains for the year. That the local market has collapsed when nothing has gone on around the world or in global stocks and with the S&P 500 remaining steady has many scratching their heads.

There have been plenty of individual catalysts that seem to have coalesced into the overall bearishness. But SPI 200 traders overnight, and the chart I often refer to of the ASX versus the S&P 500 price action for the past 12 months, suggests today might be a better day. Hopefully.

ASX 200 versus S&P 500 Daily (Source: Reuters Eikon)

2. Bond rates are rising again with a big sell-off overnight. US 10s rose to a high of 1.87% last night as the odds of a Fed hike in December climbed above 80% and after the UK GDP (see item 4 below) built on what has been an improved run of data from the global economy.

The selling in Europe was even more aggressive with German 10-year bonds doubling to 0.19% and UK 10-year gilts rising 12 points to 1.27%. These are all still really low levels by historical standards. But if US 10s head to, or break 2%, then stocks and other asset classes will be impacted.

Watch this space folks.

3. China’s president has been elevated to the same level of power as Chairman Mao. For those traders and investors who fret about Chinese growth and wonder about the sustainability of the model, the news this morning that the Chinese Communist Party (CCP) has declared Xi Jinping the “core” leader should tell them the nation has a continued commitment to his policies.

I’ve put this here because it signals that the policy of economic transformation and anti-corruption will continue. It also likely signals a continued commitment to the stimulus that is evening out economic growth in China and has helped propel Xi to this elevated level in Chinese politics.

4. The UK economy did not collapse after Brexit. Britain’s economy grew faster than expected in the third quarter of 2016, according to a preliminary GDP release from the Office for National Statistics on Thursday. According to the ONS’ data, GDP grew by 0.5% in the quarter, above the consensus forecast of economists who saw growth increasing just 0.3%.

5. Even as institutional investors add stocks, retail investors are fleeing stock funds at the fastest pace in over 5 years. Earlier in the week I reported on the improvement in State Street’s global investor confidence index which tracks cash movements and showed risk assets were being added to institutional portfolios.

But Bob Bryan reports this morning that the folks at Bespoke Investment Group say equity mutual funds have experienced their largest weekly outflows since August 2011.

“Whether you look at weekly sentiment polls like AAII, watch the headlines after a bad day in the market, or think about conversations you may have had with people about the stock market in the course of general conversations, sentiment may not be outright bearish, but it is far from bullish or overly complacent,” wrote Bespoke.

6. Janet Yellen’s idea to run the economy hot could see negative returns for bonds and stocks in 2017. The “high pressure economy” proposed by Federal Reserve chair Janet Yellen may not have any repercussions this year, but it could depress both stocks and bonds for the full year in 2017, something which hasn’t happened in nearly 50 years, says Wallace Witkowski writing over at MarketWatch.

It is certainly a thought that has occupied some of my time recently as bonds sell off in an environment where equity valuations are already stretched. Something to ponder as we head toward year’s end.